Look! Up in the Sky! It’s a Bird … It’s a Plane … It’s the Tobin Tax! Is a Global Financial Transactions Tax the World’s Next Economic Superhero?

Abstract

Like the classic superheroes, a Tobin Tax has been suggested as a solution for any number of problems. In the Tobin Tax context these problems range from currency speculation (the original issue) to financial market volatility. However, a tax is only one of many options for controlling market volatility and other kinds of economic risks. Choosing the appropriate method from among the many requires a careful evaluation of economic realities as well as the capabilities and limitations of each method. For example, in the modern global economy, local financial actions have global ramifications, often in unexpected places and in unexpected ways. Yet, current risk management techniques remain primarily national. This is partly because of existing legal regimes and partly because of administrative challenges in implementing even a regional risk management infrastructure. A Tobin Tax is rumored to be able to overcome those challenges and apply broadly across differing legal regimes. At heart, a Tobin Tax is a type of financial transactions tax (FTT) – it is essentially a tax levied on one or more of many types of non-banking financial transactions. To many academics and, lately, politicians, it is a magic bullet for all manner of financial monsters. To others, it is an unwieldy, dangerous, and impractical product of ivory tower thinkers. Nonetheless, the idea has consistently gained traction in the aftermath of late-twentieth, and now early-twenty-first, century financial crises. Of course, everyone wants to avoid financial crises. But, the question is: will a FTT do that? And, even if it might, somehow, help prevent a crisis, is it a good idea to use such a tax to accomplish that goal? This paper will investigate each of these questions in the context of the 2008-2009 financial crisis.